COMPANY UPDATE

RETAIL EQUITY RESEARCH

Bank of Baroda (BOB) BUY
Banking Rating as per Largecap 12months investment period

BSE CODE: 532134 NSE CODE: BANKBARODA

CMP Rs177 TARGET Rs200 RETURN 13%
Bloomberg CODE: BOB:IN SENSEX: 31,271

08th June, 2017

Company Data
Outlook positive… Market Cap (cr) Rs40,772
BOB is one of India’s largest banks with strong domestic presence spanning
across 5,422 branches. The bank also has significant international presence Outstanding Shares (cr) 230.4
with a network of 106 branches across 25 countries. Free Float 41%
• Net interest income (NII) increased at a moderate pace of 8% YoY despite Dividend Yield -
muted credit growth as NIM improved by 18 bps to 2.8%. 52 week high Rs202
• Gross/Net non-performing assets (NPAs) of the bank improved by 94/71 52 week low Rs136
bps QoQ to 10.5%/4.7%, respectively. 6m average volume (cr) 1.1
• We expect slippages to decline gradually and asset quality to improve Beta 1.1
with Gross/Net NPA ratios to declining 6.9%/3.0% by FY19. Face value Rs2
• We expect net profit to increase at a CAGR of 65% (albeit on a lower Shareholding % Q2FY17 Q3FY17 Q4FY17
base) over FY17-19E led by improvement in margins coupled with lower Promoters 59.2 59.2 59.2
operating expenses and provisions.
FII’s 11.9 11.7 11.8
• We continue to maintain a BUY rating on the stock with a revised MFs/Insti 21.7 21.2 20.6
upward TP of Rs200 (P/ABV of 1.4x for FY19E).
Public 7.1 7.9 8.4
Retail and Agri loans to drive advances growth Others - - -
Total loan book growth remained almost flat YoY as the bank decided to consolidate its balance
sheet in FY17. BoB has been undergoing a business transformation, whereby it is re-aligning its Total 100.0 100.0 100.0
loan book towards better yielding products with an optimal risk profile. While international loan Price Performance 3mth 6mth 1 Year
book (28% of loan book) contracted by 12% YoY, domestic loans grew 5% YoY mainly driven by
Absolute Return -9.4% 2.3% 14.3%
14% YoY growth in retail loans. However, loans to large & medium corporates declined by 4%
YoY as the bank continued to reduce its concentration on large industries. While domestic CASA Absolute Sensex -7.3% 7.2% 4.8%
deposits grew at a robust pace of 28% YoY, international deposits declined by 10% YoY. Hence, Relative Return* -2.1% -4.9% 9.5%
total deposits increased by a moderate pace of 5% YoY. CASA ratio improved by 580 bps to 32.2% *over or under performance to benchmark index
supported by demonetization. Going forward, we expect advances to grow at a healthy pace of
11% CAGR over FY16-19E mainly led by retail and agri loan books.
200 BOB Sensex (rebased)
Strong operating performance 180
Net interest income (NII) increased at a moderate pace of 8% YoY (in line with our expectation) on 160
account of 18 bps YoY improvement in net interest margin (NIM) to 2.8%. We expect NIM to 140
remain around 2.8% over FY17-19E (2.7% in FY17) on the back of relatively lower interest 120
reversals coupled with re-allocation of the loan portfolio towards higher yielding loans. 100
Non‐interest income increased at a healthy pace of 11% YoY mainly led by strong growth in core
Aug-16
Jun-16

Dec-16

Jun-17
Nov-16

Mar-17

May-17
Jul-16

Sep-16

Feb-17
Oct-16

Jan-17

Apr-17

fee income (↑39% YoY). Although the bank reported a net profit of Rs155cr as against loss in
Q4FY16, it was below our expectation due to higher than estimated provisions. Going forward,
we expect net profit to increase at a CAGR of 65% (albeit on a lower base) over FY17-19E led by Standalone (Rs.cr) FY17 FY18E FY19E
improvement in margins coupled with lower operating expenses and provisions. Net Interest Income 13,513 14,893 16,818
Asset quality to improve gradually over next two years Growth (%) 6% 10% 13%
Although BOB reported 1.4% QoQ decline in addition of gross non-performing assets, fresh
NIM (%) 2.7 2.8 2.8
slippages increased by 15.8% QoQ. Nearly 55% of slippages resulted from restructured loans,
with about half coming from corporate accounts and the rest largely from MSME and agriculture Pre Pro Profit 10,975 11,716 13,485
loans. While slippages were marginally lower sequentially, the asset quality ratios of the bank Growth (%) 24% 7% 15%
improved significantly on the back of higher QoQ business growth. Hence, Gross/Net non-
performing assets (NPAs) of the bank improved by 94/71 bps QoQ to 10.5%/4.7%. Further, the Net Profit 1,383 3,113 3,735
bank continued to provide aggressively against stressed assets. As a result, provision coverage Growth (%) - 125% 20%
ratio (PCR) improved by 233 bps QoQ to 66.8%. We expect asset quality to improve gradually and EPS 6.0 13.5 16.2
Gross/Net NPA ratios to decline to 6.9%/3.0% by FY19.
Growth (%) - 125% 20%
Outlook & Valuation
Though we expect consolidation in the loan book to continue for the next couple of quarters, we
P/E 29.6 13.1 10.9
continue to like the bank owing to its better capital position, able management and higher P/BV 1.0 0.9 0.9
provision coverage ratio. Further, gradual improvement in asset quality will lead to better P/ABV 1.8 1.6 1.2
profitability. As a result, we expect the RoA and RoE to improve to 0.5% and 8%, respectively by
FY19E. Hence, we continue to maintain BUY rating with a revised upwards TP of Rs200 and value RoE (%) 3.4 7.4 8.2
the bank at P/ABV of 1.4x for FY19E. RoA (%) 0.2 0.4 0.5
Quarterly Financials (Standalone)
Profit & Loss Account
(Rs cr) Q4FY17 Q4FY16 YoY Growth % Q3FY17 QoQ Growth %
Interest Income 10,875 11,014 (1.3) 10,406 4.5
Interest on advances 6,786 6,882 (1.4) 6,736 0.7
Income on Investments 2,850 2,689 6.0 2,719 4.8
Others 1,240 1,443 (14.1) 951 30.3
Interest Expense 7,293 7,684 (5.1) 7,272 0.3
Net Interest Income 3,582 3,330 7.6 3,134 14.3
Non-Interest Income 1,977 1,775 11.4 1,775 11.4
Total Net Income 5,559 5,105 8.9 4,909 13.2
Operating Expenses 2,539 2,533 0.3 2,314 9.7
Employee Cost 1,222 1,434 (14.8) 1,139 7.3
Other Operating Exp. 1,317 1,098 19.9 1,175 12.0
Total Income 12,852 12,789 0.5 12,181 5.5
Total Expenditure 9,832 10,217 (3.8) 9,586 2.6
Pre-Provisioning profit 3,020 2,572 17.4 2,595 16.4
Provisions 2,623 6,858 (61.8) 2,080 26.1
Profit Before Tax 397 (4,285) - 516 (23.0)
Tax 242 (1,055) - 263 (7.8)
Net Profit 155 (3,230) - 253 (38.8)
EPS - Diluted (Rs) 0.7 (14.0) - 1.1 (38.8)

Business Performance (Rs cr) Q4FY17 Q4FY16 YoY Growth % Q3FY17 QoQ Growth %
Advances 383,259 383,770 (0.1) 349,960 9.5
Deposits 601,675 574,038 4.8 589,859 2.0
Business 984,934 957,808 2.8 939,819 4.8
Gross NPA 42,719 40,521 5.4 42,642 0.2
Net NPA 18,080 19,406 (6.8) 19,006 (4.9)

Key Ratios (%) Q4FY17 Q4FY16 YoY bps Q3FY17 QoQ bps
Net Interest Margin 2.8 2.6 18 2.5 29
Cost of Funds 4.7 5.0 (34) 4.8 (11)
Yield on Advances 7.4 7.2 23 7.7 (25)
Yield on Investments 7.4 8.1 (65) 6.9 49
Yield on Funds 8.4 8.5 (16) 8.2 18
Cost to Income 45.7 49.6 (394) 47.1 (147)
Credit to Deposit 63.7 66.9 (316) 59.3 437
CASA 32.2 26.4 580 33.3 (111)
Capital Adequacy 12.2 13.2 (93) 12.6 (31)
Tier I Capital 9.9 10.8 (85) 10.0 (10)
Gross NPA 10.5 10.0 47 11.4 (94)
Net NPA 4.7 5.1 (34) 5.4 (71)
Provision Coverage 66.8 60.1 674 64.5 233
Credit Cost 2.7 7.1 (441) 2.4 36
RoE (Ann.) 1.5 - - 2.5 (95)
RoA (Ann.) 0.1 - - 0.1 (6)

Change in estimates
Old estimates New estimates Change %
Year / Rs cr FY18E FY19E FY18E FY19E FY18E FY19E
Net Interest Income 15,069 16,547 14,893 16,818 -1.2 1.6
Pre-Provisioning Profit 11,976 13,354 11,716 13,485 -2.2 1.0
Net Profit 3,138 3,562 3,113 3,735 -0.8 4.9
EPS (Rs) 13.6 15.4 13.5 16.2 -0.9 5.0
Source: Company, Geojit Research
Standalone Financials

Profit & Loss Account Balance Sheet

FY15 FY16 FY17 FY18E FY19E Y.E March (Rs cr)

FY15 FY16 FY17 FY18E FY19E
Y.E March (Rs cr)
Interest Income 42,964 44,061 42,200 45,175 49,683 Liabilities
Interest Expense 29,776 31,321 28,687 30,282 32,865
Capital 444 462 462 462 462
Net Interest Income 13,187 12,740 13,513 14,893 16,818
% Change 10.2 (3.4) 6.1 10.2 12.9 Reserves & Surplus 39,392 39,737 39,841 42,955 46,690
Non-Interest Income 4,401 4,999 6,758 6,553 7,400 Deposits 617,560 574,038 601,675 641,434 694,862
Net Income 17,589 17,739 20,271 21,445 24,218
Operating Expenses 7,674 8,923 9,296 9,730 10,733 Borrowings 35,264 33,472 30,611 31,619 35,571
Total Income 47,365 49,060 48,958 51,728 57,083 Other Liabilities &
Total Expenditure 37,450 40,245 37,983 40,012 43,598 Provisions 22,329 23,668 22,286 22,533 22,884
Pre-Provisioning Profit 9,915 8,816 10,975 11,716 13,485 Total Liabilities 714,989 671,376 694,875 739,002 800,469
% Change 10.1 (11.1) 24.5 6.7 15.1 Assets
Provisions 4,495 15,514 8,502 6,998 7,826
Profit Before Tax 5,420 (6,698) 2,473 4,717 5,659 Cash & Balances 148,353 133,900 150,470 141,115 132,024
Tax 2,022 (1,303) 1,090 1,604 1,924 Investments 116,812 120,451 129,631 144,323 156,344
Tax Rate (%) 37 - 44 34 34
Advances 428,065 383,770 383,259 421,585 474,283
Net Profit 3,398 (5,396) 1,383 3,113 3,735
% Change (20.2) - - 125.1 20.0 Fixed Assets 2,875 6,254 5,758 5,758 5,758
No. of Shares (cr) 222 231 231 231 231 Other Assets 18,883 27,002 25,757 26,221 32,060
EPS (Rs) 15.8 (23.9) 6.0 13.5 16.2
Total Assets 714,989 671,376 694,875 739,002 800,469
% Change (24.9) - - 125.1 20.0

Ratios

Y.E March (Rs cr) FY15 FY16 FY17 FY18E FY19E

EPS 15.8 (23.9) 6.0 13.5 16.2
DPS 3.2 0.0 0.0 0.0 0.0
BV 179.6 174.0 174.4 187.9 204.1
ABV 143.2 90.0 96.2 111.5 143.0
Valuation (%)
P/E 11.2 - 29.6 13.1 10.9
P/BV 1.0 1.0 1.0 0.9 0.9
P/ABV 1.2 2.0 1.8 1.6 1.2
Div. Yield 1.8 0.0 0.0 0.0 0.0
Spreads (%)
Yield on Advances 7.5 7.3 7.2 7.3 7.4
Yield on Investments 8.3 9.0 8.5 8.6 8.7
Yield on Funds 8.1 8.4 8.3 8.4 8.3
Cost of Funds 4.7 5.0 4.6 4.6 4.7
Capital (%)
CAR 12.6 13.2 12.2 12.3 12.3
Tier I 9.9 10.8 9.9 10.0 10.0
Tier II 2.7 2.4 2.3 2.3 2.3
Asset (%)
GNPA 3.7 10.0 10.5 9.3 6.9
NNPA 1.9 5.1 4.7 4.2 3.0
PCR 65.0 60.1 66.8 67.8 69.8
Management (%)
Credit/ Deposit 69.3 66.9 63.7 65.7 68.3
Cost/ Income 43.6 50.3 45.9 45.4 44.3
CASA 26.4 26.4 32.2 33.2 33.7
Earnings (%)
NIM 2.5 2.4 2.7 2.8 2.8
ROE 9.0 - 3.4 7.4 8.2
ROA 0.5 - 0.2 0.4 0.5
 Recommendation Summary (last 3 years) Dates Rating Target
250 21 May 2014 BUY 223
12 August 2014 BUY 225
30 January 2015 HOLD 178
200
03 July 2015 HOLD 158
19 August 2015 HOLD 170
150 15 February 2015 HOLD 122
17 August 2016 BUY 165
100 18 November 2016 BUY 186
17 February 2017 BUY 195
08 June 2017 BUY 200
50

0
Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17
Source: Bloomberg, Geojit Research *Initiating Coverage

Investment Rating Criteria

Large Cap Stocks; Mid Cap and Small Cap;
Buy - Upside is 10% or more. Buy - Upside is 15% or more.
Hold - Upside or downside is less than 10%. Accumulate* - Upside between 10% - 15%.
Reduce - Downside is 10% or more. Hold - Absolute returns between 0% - 10%.
Reduce/Sell - Absolute returns less than 0%.
To satisfy regulatory requirements, we attribute ‘Accumulate’ as Buy and
‘Reduce’ as Sell.
The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is
possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating.
* For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being
upgraded to BUY or downgraded to a HOLD, REDUCE or SELL.

Geojit Financial Services Limited has outsourced the preparation of this research report to DION Global Solutions Limited whose relevant disclosures are
available hereunder. However, Geojit’s research desk has reviewed this report for any untrue statement of material fact or any false or misleading
information.

General Disclosures and Disclaimers

CERTIFICATION
I, Kaushal Patel, employee of Dion Global Solutions Limited (Dion) is engaged in preparation of this report and hereby certify that all the views expressed in
this research report (report) reflect my personal views about any or all of the subject issuer or securities.

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KAUSHAL Digitally signed by KAUSHAL
KANUBHAI PATEL
KANUBHAI PATEL Date: 2017.06.07 19:05:59 +05'30'

Geojit Financial Services Ltd. (formerly known as Geojit BNP Paribas Financial Services Ltd.), Registered Office: 34/659-P, Civil Line Road, Padivattom,
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Corporate Identity Number: L67120KL1994PLC008403, SEBI Regn.Nos.: NSE: INB/INF/INE231337230 I BSE:INB011337236 & INF011337237 | MSEI:
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